5. Scenario Analysis

Performing a scenario analysis by forecasting a percentage of change in sales results in the financial ratios above. This scenario analysis was conducted by taking into consideration the other components of Wonderful World, Inc.’s financial statement, including but not limited to all variable cost and most of its current assets and

liabilities, while altering its change in sales percentage. The operating cash flow seemed to be the most heavily affected figure in the analysis. Wonderful World, Inc.’s debt to worth ratio, which shows how aggressive a company is financing its growth with debt, fluctuated slightly. The change in this ratio throughout the scenario analysis was not significant enough to violate the ratio range stipulated in the financial covenant. The Fixed Charge Coverage or Cash Flow Adequacy ratio, which measures how well a company can cover the annual payments of all the longterm annual debt with the cash flow from its operating activities, was an area for concern. This ratio should generally be looming around 1. A ratio of 1 would mean reflect the company’s ability to cover its long-term annual debt using its cash flow from operations. The forecasting scenario increasing sales by 20% resulted in a 1.72 cash flow adequacy ratio, keeping Wonderful World, Inc. well within the allotted 1.50 ratio the borrower demanded in the financial covenant. However with the 10% sales decrease and even 5% sales increase the resulting ratios did not adhere to the financial covenant stipulations. With a 10% sales decrease a -.39 ratio would result reflecting Wonderful World’s inability to cover its long-term annual debt using its cash flow from operations. Even with a 5% increase in sales Wonderful World would not hit its required 1.50 mark, although considerably more acceptable than a negative ratio it would achieve a .67 cash flow adequacy ratio. 6. Ability To Service the Debt Under Scenario Analysis As aforementioned according the cash flow adequacy ratio under these 3 scenario analysis’ the only comfortable situation WW could achieve is having a 20% sales increase. A ration of -.39 if WW’s sales would decrease by 10% would be a definite red flag, showing its inability to cover its current maturities of long term debt. Wonderful World’s current ratio, a liquidity ratio that measures a company’s ability to pay short-term obligations, remained the same at 1.40. The current ratio was not affected because of the nature of the scenario analysis. When there is a sales change in forecasting generally all or most of a companies current liabilities and current assets change as well. If sales increases or decreases then the cost of goods sold will follow suit and increase or decrease along with inventory, cash & cash equivalents, retained earnings, etc. just to specify a few. As a result the 3 forecasting scenarios would all reflect Wonderful World, Inc.’s ability to maintain http://www.investopedia.com//d/debtequityratio.asp http://www.spireframe.com/define/financial-ratio/cash-flow-adequacy